MMI March 2005
Vol. 15, No. 3: March 2005
Table of Contents — Headlines
Top 50 Shatters Sales Record
In 2004, MMI Top 50™ EMS providers hit an all-time high for combined sales. This annual list of the world’s largest EMS providers totaled $94.23 billion in 2004 sales, easily surpassing the previous mark of $79.8 billion set in 2000.
The new sales record reflects robust growth for the Top 50 group last year. Data collected on 49 of the 50 companies showed overall growth of 25.5% in 2004. (One provider was unable to provide 2003 sales.) This is but one more data point indicating how well EMS market grew last year in US dollars. With a market share well above 80%, the Top 50 acts as a proxy for the EMS industry.
Top 50 providers were ranked according to calendar 2004 sales in US dollars. It took a minimum of $154 million in sales to make the 2004 Top 50. The cutoff increased from $142 million in 2003. According to Top 50 survey results, nine EMS providers with sales above $100 million did not make the list.
Flextronics retained its lead as the world’s largest EMS company. Hon Hai Precision Industry, also known by its Foxconn trade name, moved into second position based on an estimate by MMI. Foxconn will not release its consolidated sales until next month, but a Foxconn website new this year describes annual sales in 2004 as “exceeding US$16.1 billion.” If accurate, this figure would put Foxconn even with or ahead of Flextronics. But MMI assumes that this figure is based on an exchange rate taken at the end of 2004 or in early 2005. For the Top 50, however, MMI requires companies to use average annual exchange rates when converting sales into US dollars. If one applies the US Federal Reserve’s 2004 average exchange rate for Taiwanese dollars instead of a 2004 year-end rate, that $16.1 billion drops to MMI’s estimate of about $15.3 billion for Foxconn. Still, the estimate could be wrong. If $16.1 billion represents sales that were converted properly to US dollars, then Flextronics’ hold on the top spot for 2004 will be in question.
Even though Solectron’s sales grew 18% for the approximate calendar year from December 2003 to November 2004, Solectron dropped from second place in 2003 to fourth in 2004. That’s because its revenue for the 2003 list included sales from discontinued operations. Sanmina-SCI, Celestica and Jabil Circuit maintained their third, fifth and sixth positions respectively.
Asia- and Europe-based providers gained some additional US dollar growth in the standings from the strengthening of their currencies against the US dollar. This effect was particularly evident with euro-based providers. For example, Elcoteq Network showed US dollar growth of 46% in 2004, yet its actual sales in euros increased by 32%.
Six providers in the 2004 Top 50 did not appear in the 2003 group. Interestingly, all but one of these companies are based in the US or Canada. Three of the six are returnees to the list; they are BreconRidge Manufacturing Solutions, KeyTronicEMS and LaBarge. The three others Computime, DRS Integrated Manufacturing Solutions and EPIC Technologies made the Top 50 for the first time.
Data from 48 providers yielded an average of $146,300 in revenue per employee, while a set of 47 companies averaged $650 in sales per square foot of facility space.
Flextronics Unit Adds Brazilian Company
Flextronics Network Services, a business unit of Flextronics (Sing-apore), has acquired Converge Engenharia de Comunicações S.A in Brazil from Construtura Engenharia de Sistemas LTDA. As a result, the Flextronics unit gains additional on-site network services capabilities in Latin America and acquires Converge’s customer base that includes a key relationship with Telefonica.
With about 800 employees, Converge provides construction, installation and maintenance services for an area of Telefonica’s fixed network in Sao Paulo, where Converge is based. The deal expands Flextronics Network Services’ relationship with Telefonica.
According to Flextronics Network Services, the addition of Converge complements other acquisitions recently made by the Flextronics unit. Last year, the unit acquired two network services providers in Brazil: TSP Telecomunicações e Serviços LTDA and Construtora JR Paulista, both of which supplied services for Telefonica’s fixed network in Sao Paulo.
In addition, last month the Flextronics unit reported signing new agreements covering cable maintenance and construction for TeliaSonera’s nodes and network infrastructure throughout Sweden. The agreements, ranging between one and five years, are valued at about $1.5 billion. Under a previous agreement, Flextronics Network Services became the main supplier of on-site installation and maintenance services for TeliaSonera’s fixed network customers.
Dage Sells EMS Division
TT electronics, a UK-listed company whose businesses include components and EMS, has expanded its activities in China by acquiring the Contract Manufacturing Division of Dage Holdings (Aylesbury, UK). The acquired EMS business, which operates under the name DBS, has manufacturing facilities in Aylesbury, UK, and Suzhou, China.
The purchase price was £8.0 million (about $15.4 million), subject to adjustment, for net assets of £4.9 million (about $9.4 million) as of April 30, 2004. For the fiscal year ended April 30, 2004, DBS earned a pretax profit of £1.2 million (about $2.3 million) on revenue of £19.3 million (about $37.1 million). DBS was acquired debt-free, and the acquisition will be accretive in the current year.
This acquisition expands TT electronics’ EMS business and provides the company with facilities in China to meet the requirements of its major OEM customers, particularly within the automotive industry. Also, as part of the TT electronics group, DBS’s business will benefit from enhanced access to the European and North American markets, according to a statement from TT.
For Dage, the transaction completes the final phase of its strategy to focus on test and inspection products.
Key Electronics Makes Kentucky Acquisition
Key Electronics (New Albany, IN), an EMS company formed last year, has purchased the assets of Accutronix Manufacturing Services (Owingsville, KY), a privately held EMS provider with 47 employees.
“The addition of nearly 40,000 square feet of manufacturing space in Owingsville not only is important to realizing our long-term strategic plan to increase market share, it also is critical to maintaining the momentum we’ve experienced the past several years while our new space is being completed. We need it right now,” stated A. Thomas Hardy, president and CEO of Key Electronics.
Having outgrown its New Albany site, Key is constructing a 104,000-ft2 office and manufacturing facility in Jeffersonville, IN. The company expects to move in this summer.
Key will utilize the workers and additional manufacturing capacity at the Owingsville facility to expand its services in the medium-volume custom design electronics market. With the acquisition, total employment at Key will rise to nearly 150.
The Owingsville operation will take on the name of its new parent. Mark Fulks, senior VP at Key, will assume the additional duty of GM for the Kentucky operation.
A small- and medium-volume provider, Key emerged in 2004 from the purchase of ProxyMed’s EMS business (July 2004, p. 5).
Transfers completed…Jabil Circuit (St. Petersburg, FL) has completed its acquisition of the electronics manufacturing business of Varian (Feb., p. 5)…Last month, Flextronics took over manufacturing operations of Nortel’s Systems House in Montreal, Canada, as part of a larger outsourcing pact previously announced (Nov. 2004, p. 6; Oct. 2004, p. 4; July 2004, p. 1-2). Also in February, Flextronics completed the acquisition of Agilent Technologies’ camera module business (Oct. 2004, p. 1).
Foxconn and HP Deepen Relationship
Hon Hai Precision Industry (Tu-Cheng, Taiwan), also known as Foxconn, has entered into a technology collaboration agreement with HP, a long-term customer. According to a statement from the normally tight-lipped Foxconn, this agreement will enable the two companies to deepen their collaboration, and it opens the way to new opportunities in areas that may include joint product development.
Asian source DigiTimes reported a Foxconn spokesman as saying that products earmarked for codevelopment include communication products and consumer electronics.
More alliances… Based on a memorandum of understanding, CEI Contract Manufacturing (Singapore) and the Institute of Microelectronics, or IME (Singapore), plan to collaborate for the pursuit of new business opportunities that involve IME’s semiconductor laboratory facilities. These facilities will provide IC design and low-volume chip manufacturing services. The alliance will focus on CEI’s customer base and manufacturing competencies in the industrial and life science instrumentation segments. Publicly held CEI specializes in high-mix, low-volume EMS….EMS provider NOTE (Norrtälje, Sweden) has signed an agreement with Chalmers University of Technology, Sweden to jointly set up a NOTE lab located at Chalmers in Gothenburg, Sweden. The lab will be involved with advanced packaging structures….Axiom Manufacturing Services (Newport, Wales, UK), an EMS company, has teamed up with Blackwood EMC, an EMC (electromagnetic compatibility) test lab also located in Wales, to offer a combination of EMS and electromagnetic test services….Datalink Electronics (Loughborough, UK) has entered into a joint venture to develop a signature verification device. The EMS provider has a 25% stake in Sign Assured Ltd, the company that will develop, manufacture and market the device, which will verify signatures by measuring acoustic emissions. Datalink will supply research, development and manufacturing resources….Direct Medical Systems (San Ramon, CA) has entered into an agreement with a Chinese company to distribute medical equipment made in China and to offer offshore manufacturing services….Winland Elec- tronics (Mankato, MN), a publicly held EMS company, is joining the Freescale Semiconductor Design Alliance Program, which provides qualified developers with privileged access to Freescale technology, information and services.
New programs… Solectron (Milpitas, CA) has won a new handset program from Firefly Mobile (Chicago, IL), which has developed a cell phone for children 8 to 12 years old. In Mexico, Solectron has begun full-volume production of a Thomson set-top box. Also, Solectron Centum, Solectron’s business in India (Bangalore), has landed an automotive program from ABB, an automotive components supplier. Asia Pulse reported that the three-year contract to export PCB assemblies was initially valued at $20 million….Fabrinet has signed a volume supply agreement with BEI Systron Donner Automotive Division (Concord, CA) to manufacture its MicroGyro assemblies in Bangkok, Thailand. SDAD is described as the world’s leading supplier of quartz MEMS (micro electromechanical systems) technology inertial sensors for the automotive market….Shera Technology (Kunshan) Co., an American-run EMS provider in based in Kunshan, China, has landed an agreement to provide manufacturing services to Datastrip Group for its DSVII family of biometric smart card terminals….Under a new $12.3-million contract, LaBarge (St. Louis, MO) will provide Northrop Grumman with electromechanical subsystems and modules for an automated mail sorting system. The provider will manufacture subassemblies that enhance the sorter in-feed units previously built by LaBarge as well as modules which are part of an overall system upgrade. Also within Northrop Grumman, the company’s Electronic Systems sector awarded LaBarge an additional $2.6-million contract to produce electronic chassis used in the fire control radar system in the F-16 aircraft. Finally, LaBarge has received a $3.2-million contract from L-3 Communications Security and Detection Systems. The provider will manufacture electronic equipment for an airline checked-baggage screening system that uses x-rays to detect the presence of explosives or contraband. This agreement follows a contract that L-3 awarded LaBarge last fall.
More capacity…US-traded Nam Tai Electronics has invested $2.2 million to increase chip-on-film capacity by 40% and $2.3 million to equip two additional SMT lines. The added SMT capacity will accommodate increasing orders for new products including digital audio broadcast modules and cell-phone RF motherboards. The company has also upgraded its chip-on-board production to include gold wire ball bonding for manufacturing CMOS image sensor modules of high resolution. Customer demand for these modules is strong as they are used in devices such as cell phones with a built-in camera function. In January, Nam Tai announced that it planned to hire over 1,000 workers for its manufacturing base in Shenzhen, China. As a result, the total number of employees will increase from around 5,600 to 6,600 by the end of March….Express Manufacturing, Inc., or EMI (Santa Ana, CA), has installed four new Fuji machines in one of its Orange County facilities. The new machines will help to expand EMI’s prototyping capabilities in keeping with the company’s philosophy of supporting early-stage manufacturing and prototyping through its EMS facilities in Southern California. In addition, the machines will allow EMI to provide customers the flexibility of small production runs while also delivering large-run benefits of automation, lower costs and higher reliability, stated EMI.
New service offerings…Arrow OEM Computing Solutions (OCS), a division of distributor Arrow Electronics, has expanded its offering of design engineering and post-manufacturing services. The Arrow division is presenting itself as a one-stop, full-service partner for the manufacturing and product lifecycle support of industrial computing solutions in markets that include federal (defense, aerospace), medical, industrial, communications, and point-of-access/gaming. Arrow OCS is part of Arrow’s North American Computer Products group (Englewood, CO)….Genesis Electronics Manufacturing (Tampa, FL) is adding LCD repair capabilities to its offering of manufacturing and repair and logistics services….Lightspeed Manufacturing (Methuen, MA) has introduced a mobile van service that will bring assemblers, rework/repair technicians, and their equipment to a customer’s facility.
Other company news…Celestica’s Monterrey, Mexico, facility has won the 2005 Shingo Prize for excellence in applying lean manufacturing principles. Celestica is the first EMS provider to receive this award….China’s Ministry of Commerce ranked Foxconn Precision Industry (Shenzhen), a unit of Hon Hai Precision Industry, number one in exports among foreign-invested companies, according to Asian sources. The Foxconn unit exported $8.27 billion in goods from China in 2004….The Eden Prairie, MN, facility of Micro Dynamics Corporation has achieved ISO 13485 certification, used by the medical device industry. According to MDC, this certification allows the company to further develop its market share in the medical segment.
Industry litigation…Suntron (Phoenix, AZ) recently filed a lawsuit seeking over $20 million in damages from Applied Materials, a former customer. The lawsuit claims that Suntron has been left with more than $18 million worth of unused and obsolete inventory for which Applied Materials owes it reimbursement. Suntron also seeks reimbursement for other costs it associates with this dispute, attorneys’ fees, interest, and an award of exemplary damages for alleged fraud. Suntron’s lawsuit claims that Applied Materials defrauded Suntron into spending millions of dollars on raw materials and other inventory-related costs, as well as capital and human resources, with false promises of reimbursement. Suntron said it spent years attempting to resolve this dispute. …PEMSTAR (Rochester, MN) has settled its securities class action lawsuit and consolidated derivative lawsuits, initiated in 2002. To settle the securities class action lawsuit, the company’s insurers will pay $11.75 million, and PEMSTAR will pay $250,000. The settlement of the derivative lawsuits requires PEMSTAR to enhance certain corporate governance policies and provides for payment of plaintiff’s attorney fees, which will also be covered by the company’s insurers. Under the settlement, PEMSTAR denies any violation of the securities laws. The settlement agreements are subject to court approval.
More restructuring…In late January, Celestica announced another round of restructuring, which will result in 2005 charges estimated at $225 to $275 million. The company plans to reduce its global work force by 10 to 15%, or about 5,500 employees, over a 15-month period. Celestica also intends to decrease the capacity of its existing footprint by 10 to 15%. Since February, the company has announced that it will close plants in Mt. Pleasant, IA, and Raleigh, NC, and will cease EMS operations in Salem, NH….San-mina-SCI (San Jose, CA) expects to increase its phase-3 restructuring charges from about $100 million, as announced in July 2004 (p. 5), to about $175 million. As of Jan. 27 in this round of restructuring, the company had announced actions at nine sites, with some eight being closures. …Three-Five Systems is moving its headquarters functions from Tempe, AZ, to its EMS facility in Redmond, WA. The company has named James Jurgens interim CFO to replace Jeffrey Buchanan, who decided to remain in Arizona. To reduce excess capacity, TFS is exploring the potential sale of its Manila, Philippines, factory.
Problems in Mexico… PEMSTAR has found that inappropriate and irregular accounting entries were made at its Guadalajara, Mexico, facility (Nov. 2004, p. 7). As a result, PEMSTAR increased its fiscal 2004 loss by $5.5 million and decreased Q1 fiscal 2005 income by $0.7 million. The company has implemented controls to prevent a reoccurrence of this problem. Also, for fiscal Q2 (ended Sept. 30, 2004), PEMSTAR increased its previously reported net loss by $0.9 million based on accounting changes made for the Mexico operations….Plexus (Neenah, WI) discovered that a number of high-value parts were systematically stolen from its Juarez, Mexico, facility. The provider has taken steps to improve security and control of high-value parts kept at the facility. Reflecting this theft and other inventory control problems there, a $900,000 inventory adjustment was taken for Plexus’ fiscal Q1 ended Jan. 1, 2005.
Some financial news…Solectron reported a GAAP loss from continuing operations of $5 million on sales of $2.76 billion in its fiscal 2005 Q2 ended Feb. 28. Non-GAAP net income amounted to $40 million. Sales were down 4.6% from the year-earlier quarter, but were up 2.4% from Q1 of fiscal 2005. Solectron now expects that second-half revenues and earnings will not be higher than first-half results. This latest guidance means that Solectron believes fiscal 2005 sales will be lower than fiscal 2004 sales. The company’s previous outlook, provided in December 2004, called for higher revenues in the second half than in the first half and flat sales for fiscal 2005 (Jan., p. 7). Solectron said it changed its outlook primarily because of slower market ramps of new products for its major handset customer, reduced production schedules for two customers in set-top boxes and DVRs respectively, and a slower than expected ramp of an Internet computing device for developing markets….For fiscal Q2 ended Feb. 28, Jabil Circuit reported sales of $1.72 billion, up 15% from the year-earlier quarter. Net income for Q2 fiscal 2005 amounted to $46.0 million versus $40.0 million in the year-earlier period. Core operating income increased 10% to $68.1 million, or 4.0% of sales, compared with $62.2 million, or 4.2% of sales, for Q2 fiscal 2004. Jabil now expects fiscal 2005 growth in revenue and core earnings of about 20% and 25% respectively.…In 2004, Elcoteq Network (Espoo, Finland) earned net income of 39.8 million euros on sales of 2.95 billion euros, which increased 32% over 2003. Sales in the Americas more than tripled compared with 2003. Elcoteq and Tellabs have agreed to terminate their cooperation during the fall of 2005. According to Elcoteq, factors underlying this decision were changes in Tellabs’ own business and strategy. Net sales from the Tellabs account in 2004 totaled about 60 million euros, and the result was a loss….Suntron reported a net loss of $4.5 million on 2004 sales of $475.4 million….SMTC (Mark-ham, Ontario, Canada) recorded net earnings of $1.3 million on 2004 revenue of $244.6 million…Excluding reorganization gain and expenses, Reptron (Tampa, FL) posted a loss from continuing operations of $2.6 million on 2004 sales of $141.6 million….Nortech Systems (Wayzata, MN) reported net income of $587,329 on 2004 sales of $72.7 million.
For the EMS industry, outsourcing is a prescription that all OEMs should swallow. But often it holds the greatest appeal for companies in financial straits. If they can reduce their costs while taking assets off the books, the prospect of financial gains becomes compelling. Internal resistance to outsourcing dissolves in the face of such potential gains. Since outsourcing provides a path to financial improvement, does it follow that internal manufacturing is an impediment to success? Not necessarily, it turns out.
Dell and Nokia continue to manufacture products generally considered to be commodities, yet each is the market leader when it comes to those products. Dell still manufacturers PCs, while Nokia continues to produce cell phones. The two market leaders provide a reality check for those who would promote outsourcing as a universal strategy.
Take Nokia. About 20% of its handset production is outsourced, and most of that outsourcing is in the form of subassemblies. Nokia prides itself on being very good in supply chain management. Maintaining number-one share in cell phones, the company obviously has tremendous buying power when it comes to cell-phone components. Manufacturing continues to be a competency of Nokia. The outsourcing that Nokia does engage in is done mostly for flexibility, the company told MMI.
It would be hard to imagine how Nokia would get better prices on silicon by outsourcing to an EMS provider or ODM. With its own facilities in China, Nokia need not outsource to benefit from China’s lower costs. What’s more, Nokia can launch a product without any handoffs, which can be a time saver.
In the case of Dell, the computer OEM has shown its commitment to PC manufacturing by starting construction of its fourth US manufacturing facility, a 527,000-ft2 plant in North Carolina. MMI believes that Dell can continue to build its own PCs because its operations are highly efficient. For example, because of its purchasing clout, Dell can require that suppliers deliver materials just in time. So raw materials inventory is minimized. Dell’s vaunted build-to-order model also keeps a lid on finished goods inventory.
Sure, Dell does not make all of its own products. The company uses ODMs to produce some consumer electronics products. But the company has kept its number-one position in PCs, while maintaining a global manufacturing network for them. All of Dell’s PC manufacturing worldwide consisting of desktops, notebooks and servers is done in Dell facilities.
While wholesale outsourcing can benefit the bottom line, it is possible to be successful with an internal manufacturing capability. Dell and Nokia have proven that. The reality is: outsourcing is not a one-size-fits-all strategy.